1 METU Department of Economics Econ 202 Macroeconomic Theory Spring 2010 Problem Set 8 Q.1 Suppose the Phillips curve is given by (all units are in percentage points): ± ² ± ³ ´ µ¶ · ¸¹ ± ººººººº»ººººººº ± ³ ² ¼ ±½¾ º Assume that in period t-1, the unemployment rate is equal to the natural rate and the inflation rate is zero. a) What is the natural rate of unemployment in the economy? b) Suppose that beginning in period t , the authorities bring the unemployment rate down to 3% and keep it there indefinitely. Determine the rate of inflation in period t+1, t+2, t+3 when ¼ ² ¶ . Then do the same for ¼ ² µ . c) For which of the two values of θ does ¹ ± ¿ ¹ À imply an acceleration of the price level? d) Suppose the authorities do not know what the natural rate of unemployment is. Can they find out what it is, how? e) Assume that 1/3 of the workers sign indexed labor contracts. Redo part (b) under this assumption. f)
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